Green Building Could Lead to Lawsuits

Lawyers spot project pitfalls in LEED certification.

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September 16, 2008

As LEED projects proliferate, lawyers foresee an era of green-construction lawsuits.

Eight years ago, the U.S. Green Building Council launched a voluntary program called Leadership in Energy and Environmental Design to encourage conservation. Project owners and builders can achieve LEED certification — certified, silver, gold or platinum — by earning points in different green-building categories.

Beyond the environmental benefits, the certification offers marketing opportunities for building owners and the chance to make — or lose — a lot of money.

“If you’re selling this thing to your senior management because it’s good for the environment, it’s good for the community, and it’s the right thing to do, then when you eventually get beyond the love affair, this thing better produce,” said Donald Murano, a plaintiffs lawyer in St. Louis who serves on a risk-management task force with the Green Building Initiative, a nonprofit organization in Portland, Ore. “Over the next five or 10 years, you’ll see an exponential growth in litigation.”

Lawyers expect more lawsuits as building owners realize a green stamp of approval translates into good public relations, higher rents and tax breaks. When contractors or design professionals fail to deliver, owners may seek payback.

Frank Musica is a risk-management lawyer with Victor O. Schinnerer & Co. Inc., the largest underwriter of professional liability insurance in the country. He said green-related claims are increasing against architects and engineers insured by his Chevy Chase, Md.-based company.

“When a developer has a problem with a project, he’s going to claim a number of things,” Musica said, “including, ‘You told me I’d get a certification, and I’m not getting it.’”

In the last two years, Musica compiled a list of green-claims cases against Schinnerer policyholders. He would not identify the people or companies in the cases.

One is a lawsuit filed against an architect by the owner of a LEED silver office building. A tenant demanded a rent rebate after one year. The suit alleges that promises of healthier indoor air quality proved untrue, as sick days increased, production lagged and employees complained of eye strain and drafts.

Another LEED-related case involved a developer who sued an architect after the architect guaranteed LEED gold certification. Budget and time constraints prevented the project from achieving gold, but in marketing the office building, the developer had emphasized the anticipated LEED certification to attract tenants at higher rents.

Both cases remain unresolved.

Liabilities within LEED process

Daniel K. Slone, a partner in the Richmond, Va., office of McGuire Woods, which has been the USGBC’s outside counsel for about 12 years, doesn’t expect the legal web to ensnare the building council.

In the LEED-certification review, he said, “The building owner has paid the USGBC to go through a process, and in the absence of fraud or something that might be a direct contractual sort of claim, we have not seen any liability for the USGBC.”

Slone said one type of dispute that has arisen is brought by tenants who use the LEED certification as a basis for their decision to move in, and, presumably, pay higher rent than in a non-LEED building.

“But you, as a building tenant, don’t have a contract with the USGBC,” he said. “You don’t have any basis on which you can say, because the information you relied on was incorrect or something slipped up in the process or there’s some aspect of this performance that doesn’t match up to your expectations, that you have a right of action against the USGBC.

“You may have a complaint. You might have issues about the reliability of this process, but you don’t have a right of action.”

The process of achieving LEED certification is akin to filling out a checklist, said Brian D. Anderson, an attorney with Axley Brynelson LLP, Madison. But acquiring LEED points doesn’t necessarily translate into a green building, he said.

“It’s dangerous to make a claim that because your building has achieved a certain level of LEED certification that it’s going to produce these specific benefits,” Anderson said.

“There are a lot of exaggerated claims. As an attorney reading through these things, I think, ‘Oh my goodness, somebody’s going to get sued.’”

Environmental claims related to occupants in LEED-certified buildings are particularly suspect, Anderson said. Such claims essentially say workers in LEED-certified buildings are healthier and more productive. But Anderson said the research to support those conclusions is lacking, “and once plaintiffs lawyers get hold of these kinds of claims they’ll rip them to shreds.”

Another area for potential litigation, Anderson said, is shareholder action. He said he understands LEED has a pilot program in which large companies can “bulk certify” many buildings on the basis they share the same design. Broad-scale investment to achieve LEED certification will require public companies to disclose those investments to the Securities and Exchange Commission.

“And anything that it submitted to the shareholder and to the SEC can enter the very fertile grounds of securities litigation,” Anderson said.

Contracts need to be specific

Jeffrey D. Masters, a Los Angeles real estate attorney, said green-building litigation probably will include not only breach of contract, but also negligence and fraud. He said he advises builders and developers to avoid just characterizing a building as green.

Instead, they should be specific about the particular product or technology they use, he said.

That attention to detail extends to spelling out exactly the responsibilities of each person on the project team in achieving a certain level of LEED certification, said Michael W. Nelson, a LEED accredited professional and lawyer with Milford, Mich.-based Green Building Inc., an environmental-services company.

“The responsibility for attaining LEED may be a performance specification that states a precise LEED objective, or it could be a ‘best efforts’ type standard,” he said. “LEED objectives should also be incorporated into various other documents, including drawings and specifications, which are integrated into the project’s governing contract.”

The responsibilities and green explanations need to be clear because owners and tenants are becoming savvy about LEED and are drafting flexibility into contracts to cover its uncertainties, said Lawrence Ostema, a LEED AP lawyer in Charlotte, N.C.

He said tenants are increasingly taking the position, “‘We will sign a lease before you get your certification, but we want to have a rent reduction if you miss the targeted level of green. Or, if you entirely miss it, then we can terminate the lease.’

“A smart landlord or developer would say, ‘OK, if we exceed LEED silver and we get LEED gold, then you’ll pay us more.’”

If the owner missed the LEED certification, Ostema said, that could mean his lender is angry because he had covenants that LEED certification was necessary.

“Now I’m going to go to my general contractor and my architect and possibly look at pursuing them,” he said.

The liability quest could trickle further downstream to product manufacturers, Ostema said.

From the plaintiff’s perspective, Murano said, it won’t be necessary to identify who’s responsible when a building doesn’t get its anticipated certification or doesn’t perform up to snuff.

“You don’t have to pick among the carnage,” he said. “You just throw everybody into the mill and say, ‘You didn’t collectively perform. You guys flesh it out. All I